Consumer Is Key To Next Recession

Frugality! The is the key word in today's economic society. Consumers under pressure by rising inflationary costs and lower wages, declining home prices and job worries, political uncertainty and global risks, are more concerned than ever that "something wicked this way comes". Today's release of the consumer confidence survey certainly depicts these concerns and realities with the consumer's assessment of current conditions at its lowest point since December 2010 and one of the lowest readings on record.

The first chart shows all three indexes for comparison. While consumer confidence in regards to the economy has eroded drastically over the last several months dropping 6.6 points to 39.8; consumers attitudes about the current economic environment have plunged back toward the 2009 lows dropping 7 points to 26.3.

However, what is most concerning, and a real thorn in the side of the those expecting an economic recovery in the coming months, is the expectations of economic improvement going forward. This index nosedived 6.4 points to 48.7. This is very concerning for one primary reason. The forward expectations index of the economic environment is closely tied to personal consumption expenditures. Since the economy is 70% driven by consumption the expectations of a weaker economy by consumers doesn't bode well for increased consumption.

As you can see in the chart the recent sharp decline is most likely indicating weaker consumption ahead and this doesn't bode well going into the holiday shopping season. Of course, this poor outlook by consumers is not surprising considering that only 11.0 percent described business conditions as good and 43.7 percent, describe conditions as bad.

Furthermore, and not a good sign for holiday spending, there was considerable weakness in income expectations where only 10.3 percent see their income rising and 19.2%, see their income falling. This inversion in income with pessimists on top is very rare for this series.

Income perception is also crucially important. The only thing separating the U.S. consumer from completely contracting has been the recent and drastic drawdown in personal savings to fund the gap between income and personal living standards. The personal savings rate has dropped from 5.3 percent in June to 4.5 percent currently. This is not surprising given their concern of income weakness and economic risks that are impacting them on the home front.

The chart shows the consumer confidence index overlaid against the INVERSE of the personal savings rate which shows the correlation between confidence and savings. The decline in consumer confidence is indicating a rise in personal savings. Should this occur, that means less fuel to feed the consumption that supports the economy. This doesn't bode well for retailers as well as the rest of the economy as a whole and also goes directly the "aggregate demand" component the feeds future employment. Maybe this is why the "jobs hard to get" component of the index is running near historic highs at 47.1 percent.

As we head into the fourth quarter we will see the tax credits and tax cut extensions from last December begin to fade. For most those incentives were spent long ago. Therefore, while the market and the analysts all have high hopes we watch as Europe dances around the ropes trying to pull a bailout rabbit from the hat, the U.S. as it flirts with the idea of mortgage bailouts and more Q.E. (highly inflationary) while all the while the consumer is trapped. The daily headlines that permeate the media entrench their fears while they watch incomes stagnate, employment hopes dwindle as layoff intentions rise and food and energy consume more than 22% of their wages and salaries. Really, is anyone surprised that confidence is in the tank?

So, while economists and Wall Street tout the slight bump in Q3 GDP as a clear sign recession has been avoided; the reality is that the consumer may be telling us something quite different.